A total of 18 bungalows are being built in Dene Terrace in West Chilton.
The site was acquired by the council in 2014 and 52 terraced properties were demolished, many of which were empty and unfit for use.
The scheme is being Esh Group using Homes and Communities Agency funding on behalf of Livin housing association.
Cllr Kevin Shaw said: "We have been working on the regeneration of West Chilton for a number of years and have implemented a number of measures to help improve the lives of residents.
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"The start of building work is an exciting stage in the improvement of the area and we know the new housing development will be a welcome step forward for residents."
Graham Morgan, divisional director of Esh Construction Property Services, said: "As a company that believes in creating value for communities, Esh is pleased to be creating affordable homes for Livin and Durham County Council.
"We specialise in delivering high quality homes as part of housing-led regeneration projects for a range of partners.
"The West Chilton scheme will help to shape the improvement of the area together with creating employment opportunities through the construction process too."
(LM/MH)
